The economics and politics of instability, empire, and energy, with a focus on Latin America and the Caribbean, plus other random blather and my wonderful wonderful wife. And I’d like a cigar right now.

April 04, 2012

The market for stolen oil

“In a reversal of the classic Western movie, Mexican criminals have sought refuge with their ill-gotten gains by crossing the Rio Grande to the North, where the Mexican government has no authority to follow.”

—Pemex, in a suit before the U.S. District Court for the Southern District of Texas

So, stolen oil from Pemex makes its way to the United States. How, you ask? It’s a reasonable question. Oil has a high value-to-weight ratio, but cocaine it isn’t. You can’t smuggle economically-viable quantities in jerrycans. Plus, if you’re moving crude oil or natural gas condensate, you can’t then flog it on a streetcorner. You need to sell it to a refinery.

The answer: give the refineries plausible deniability. Fake paperwork to get it over the border, then sell it to a reputable middleman. How did this work?

On May 29, 2011, we got the answer, when Pemex filed a federal lawsuit in the southern district of Texas against a group of American refineries for knowingly buying stolen natural gas condensate.

Here’s the value chain. The condensate is produced in Mexico’s Burgos gas field, located near the U.S. border across the northern stretch of Tamaulipas, Nuevo León, and a little bit of Coahuila. Pemex produces gas from 2,827 wells in the field. It then pumps the gas to 150 collection stations. Pipelines then transport the gas and condensate (the liquid byproduct from gas production, which can be used in oil refineries) from these 150 collection stations to 52 transfer and delivery systems, which are basically small pipeline networks. After collection at the transfer systems, Pemex transports the condensate by pipeline or tanker truck to a storage facility near Reynosa, Tamaulipas. From there, the condensate goes by pipeline to the Burgos gas processing center or tanker truck to a refinery in Cadereyta, Nuevo León.

The Zetas intercept the oil in one of three ways. The major one is to simply tap into the transfer and delivery systems. (To do this, the Zetas needed to build their own pipelines, a pretty impressive accomplishment.) The secondary one is to hold-up the tanker trucks on their way to Reynosa. The final one is to kidnap Pemex officials and force them to divert condensate.

Now, the Zetas can easily fence refined products inside Mexico, but they can’t sell condensate: Pemex operates the only refineries! So they have to move it to the U.S. According to the lawsuit, the stolen condensate was moved by tanker truck (think about that for a moment) to the border. Before crossing, however, the Zetas transferred the stuff to newer trucks that meet U.S. regulations. The drivers then presented forged export documents, sometimes mischaracterizing the condensate as naphtha. They would then sell the stuff to the U.S. defendants.

Big Star and F&M Transportation bought the oil from Ygriega Energy Corporation of Edinburg, Texas, whose owner, Arnaldo Maldonado, has already pled guilty to felony conspiracy to receive and sell stolen goods. F&M transported the condensate, in addition to buying it. Superior Crude also transported stolen condensate, and brokered sales of the stuff. (Pemex fingered Superior because a man named Donald Schroeder coordinated the shipments ... who has also pleaded guilty to felony conspiracy to receive and sell stolen property, specifically Mexican condensate, in his role as president of a company called Trammo Petroleum.) Finally, TransMontaigne operated the storage facilities in Brownsville which the stolen condensate passed through on its way to the final buyers. Finally, Western Refining bought condensate from companies like Continental Fuels, whose president confessed to trafficking in stolen goods.

In other words, according to Pemex, Big Star, Superior Crude and F&M “actively and knowingly participated in a conspiracy to import and market the stolen condensate in the United States.” TransMontaigne, meanwhile, stands accused of negligent participation, since Pemex claims that they should have realized that the goods passing through their hands were illegitimate. Western Refining is accused of no wrongdoing, but Pemex says that it is liable for all its transactions involving Mexican condensate. Recently the company has moved to add subsidiaries of ConocoPhillips and Shell to the lawsuit.

Now here’s the good news: on the U.S. side of the border, several people are going to jail and the rest of the companies involved in buying the stuff are facing a serious civil suit. In short, it is likely that the United States legal system will soon enough shut down the export of stolen Mexican crude and condensate.

But there’s also bad news: there is money to made in stealing refined products and selling them inside Mexico. Lots of money. In fact, as Patrick Corcoran has pointed out, the fact that pipeline-siphoning is shifting to Sinaloa (where the lines carry refined products) is a sign that other groups besides the Zetas are getting into the act. (In this case, likely El Chapo’s people.) The U.S. government can and will help. But it can’t change the fact that Mexico is now a lucrative market for its own petroleum production. Keeping organized crime from taking more of that market is something that Mexico will have to solve on its own.

David Shields got the solution to the problem of internal oil theft right when he wrote:

“It’s very easy to solve this. Total control over the tanker trucks. Total control over every liter of gasoline from the refinery to the gasoline station. That’s the way it was 15 years ago. You move the army in and take control over all the distributors by making sure they have a contract for every single movement of gasoline around the country.”

Where I would disagree with Mr. Shields is that the solution he proposes is far from easy.

Comments

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Fantastic article, Noel. I am even more pessimistic than you are about Shields' solution. For years, PDVSA has suffered thefts of entire tanker trucks of fuel. The problem is not that it's difficult, technologically, to stop the theft. The problem is that the corruption reaches too high in the organization. There is a painfully big arbitrage to be made by breaching the rules. A Mexican tanker driver might earn $10,000 a year; a 10,000-gallon tanker truck might be transporting as much as $40,000 in a single shipment. So a single diverted shipment can double his salary, along with that of his boss and his boss's boss. In the case of PDVSA, I know a security consultant who priced out a GPS-based system for the tanker trucks years ago that would have ended thefts. The proposal was never enacted. No one knows why, but I think it's a fair guess that the people responsible for enacting it are making money off the status quo.

Some oils burn in liquid or aerosol form, generating heat which can be used directly or converted into other forms of energy such as electricity or mechanical work. To obtain many fuel oils, crude oil is pumped from the ground and is shipped via oil tanker to an oil refinery.

I live here in south Texas and stealing of natural gas condensate from Mexico and from ALL OVER south Texas has been a problem for decades. More so in South Texas because we have had oil and gas production since the 1930s and our field formations produce a lot of condensate. It's not like this is anything new. In fact, trucks of condensate continue to drive across the Los Indios Bridge in Pharr Monday thru Friday and delver to the tanks in Starr County just as Shell has done for years. Nothing has changed here on the ground. On our side of the border, the condensate is mostly stolen from ExxonMobil, El Paso Exploration, and Chevron. Nothing can be done because law enforcement has no training to patrol oilfields and it's always an inside job.